The new path to a successful blockchain project: designing in a token-based flywheel
ICOs are dead.
Few will argue that we aren’t currently in a crypto winter, but the crypto and blockchain spheres are completely different and for all the cynicism around the future of blockchain, the truth is we are actually in a really good place. The difference is that the “get rich quick” schemes and the scam ICOs of the past couple years are dying off, while the blockchain space as a whole becomes more professional, regulated and more akin to traditional business.
Blockchain is going back to the basics, and that is a very good thing for both the industry and its consumers. There is a new staple within blockchain, and it is indicative of the direction the industry is moving towards as a whole. The market leaders in the blockchain space, as well as the best-in-class startups, all have inventive and well thought out token-based incentivization mechanisms, with strong teams who can effectively deliver the products they propose.
Why is this shift happening?
In the short time blockchain has been in the spotlight, it has developed a rich and complex history, but the reason for this shift of “back to the basics” is actually quite simple and comes down to two key reasons.
ICO scams and the bad connotation
For the past few years, the blockchain industry became saturated with fraudulent ICOs which preyed on contributors by pitching appealing or vague project concepts that they never actually intended to see to fruition. According to a report by CCN, 271 scam ICOs stole more than $1 billion from their contributor. Not all of these scam ICOs were ill-intentioned either, many were well-meaning projects who were simply unable to carry out their plans, as Darren Marble of CrowdfundX said, “Even the projects that don’t think they’re scams are scams, because they’re just not going to work.” Over time, this created a markedly negative public perception on ICOs that spread like an infection to the blockchain space as a whole, and this effect still persists to this day.
More legitimate businesses are being built on the blockchain
As it stands today, the blockchain industry is actually in a really good place, and the projects that are achieving their goals and becoming successful are much more legitimate and organized than they were just two years ago, largely in part due to the ongoing regulative transformation the space has gone through as organizations such as the United State’s Security Exchange Commission have set more and more legal precedents which have further legitimized blockchain companies overall. Modern projects are now much more professional, have good teams, strong scalable ideas, have proven their team is capable of seeing the project to fruition and are above board on their adherence to new laws and ethical standards.
Beyond having a great team ready to execute their mission, dApps and protocol projects are beginning to achieve their success through strong token-based flywheels built into their project’s ecosystems.
Token-based flywheel — Incentives drive consumption
A token-base flywheel is a system of behavior modification through incentivization. In a token-based flywheel, a target’s desired behavior is reinforced through positive and appealing incentives. With this model, consumers receive symbols, or “tokens”, for good behavior which can be exchanged for further reinforcers. These incentives drive the consumer to engage with the system in the same manner over and over again, creating an incentive loop that maintains enthusiasm and dedication to the product over long periods of time. Token economy is an example of the Incentive Theory of Motivation which theorizes that human motivation is driven by a desire for reinforcement and incentives.
While traditional coin models appeal to consumers by promising an increasing fiat value for the coins in the event that they become popularized at a later date, and become a liquid form of money, token models are built around specific markets or businesses with the intent of creating a better method of circulating value between their participants. The tokens themselves aren’t about the fiat value, but the method in which they allow users, stakeholders, partners, suppliers, etc., to engage with the products, while the actual price and value of the token is reflective of the value of the service being provided.
Put simply, a token-based flywheel creates a dedicated user base by incentivizing the types of behavior the company wants to reinforce through the use of token rewards.
An example of the market direction
In November, 2018, the third generation blockchain platform, EOSIO, hosted a hackathon. The prompt for the participants was to, “build an EOSIO application that fosters a fundamental competitive advantage by implementing a business model that aligns interests amongst stakeholders and/or drives more value back to users.”
The hackathon was just one example, among many, that blockchain businesses are placing a much higher emphasis on building their applications around the token, to create a loop that both benefits the customer and the investors. In the past, too many projects simply had a token to justify using an ICO to raise funds, but now, all the best projects in the market are intensively developing their project to be a token economy.
When reading a project’s white paper, a clear sign that they are not taking their token economy seriously, is if they explain it in vague, unsubstantiated terms or don’t bring it up altogether. White papers like these show that they are a business that just happens to have a token, as opposed to being a tokenized business. In order to reach the full potential a project has, it needs to focus sufficient time and energy into developing a knockout business strategy for its token economy.
Creating a strong token-based flywheel
The framework for a successful token-based flywheel model needs to be carefully and deliberately planned out. It not only needs to create a strong value proposition for all participants, i.e., the consumer, the shareholders and the business itself, but it needs to, in particular, incentivize people to buy, hold and regularly use the tokens.
The three key aspects of incentivization for a powerhouse token economy:
- Incentives for people to begin using the platform (Enter) — Acquisition
- Incentives for users to continually use the platform (Stay and Play) — Engagement
- Incentives for users to stay with the platform long-term (Captivate) — Retention
The flywheel and network effects
Token-based economies in the startup world are greatly influenced by the concept of the flywheel and the network effect. The flywheel effect was coined by Jim Collin’s in his book, ‘Good to Great’ and refers to a business model that doesn’t achieve its success through one grand action, but instead puts into place a cumulative effect that slowly begins turning the flywheel, in the case of a token economy, user incentives, that promotes growth over time until there is enough momentum that it begins to rapidly move on its own. Once the flywheel reaches this stage, it achieves liquidity between peers and the sum of network value is higher than the sum of cost associated with acquiring each side.
In order for the flywheel and network effect of a startup to succeed, they need to identify a key measurable metric that represents the company’s core mission. All the design behaviors of the token economy they create should converge to enforce the growth of that specific metric. The incentives of a token economy should all align to support the company’s mission and ultimately bolster its growth.
The takeaway
The blockchain industry is one of the most rapidly changing industries in recent decades, and with any new industry it went through severe growing pains. However, for all the fear of burnout, bankrupt businesses and broken promises, the blockchain industry is finally nearing its adulthood. Now that regulations have been put into place, and all the scam ICOs are dying out, blockchain can finally move past being the biggest “get rich quick” scheme of the internet age, and move on to realizing its potential. And that potential is actually quite traditional.
Blockchain technology allows an unprecedented level of user incentivization and business development, and that is largely thanks to token-based flywheels.
ICOs might be dead, but blockchain is just beginning.
Originally published at propulsive.io on March 6, 2019.
